Keeping Irish economic recovery going? Policy or prayer?

"Let's keep the recovery going" is the Fine Gael slogan of the general election but apart from hoping that prayer or luck would end the current turmoil on global markets, Fine Gael does not say how it would respond to a dip in growth in key markets because a) it could do nothing about it b) it would wish to avoid raising doubts that its election tax and spending promises would have to be junked.

Data issued this week showed sharp falls in German, British, French, and Italian industrial production in December. Last week the CSO reported that Ireland's industrial production fell 3.2% but this overall is fantasy data as there was a rise of 20.4% in the year with mainly pharmaceutical production jumping 36.5% (to increase production in the real world by over third in a year requires lots of spare capacity or either a wizard or tax accountant to magic it up). However, what is interesting is the reliable part of the Irish data which showed that there was a monthly drop of 7.1% in the “Traditional” Sector (mainly indigenous firms) for December 2015 and an annual decrease of 3.5% compared with December 2014 — this may reflect a slowing of the UK economy.

In the US, Greg Ip in The Wall Street Journal writes that with Thursday’s selloff, the Dow Jones Industrial Average is now down 14.5% from its all-time high last May. Yields on risky bonds continue to climb, while investors have sought safety in US Treasuries, sending those yields lower. And oil has hit a nearly 12½-year low.

However, the economic data show no recession. Job growth in January was healthy, and employers are having trouble filling vacancies. Ip says this dichotomy is neatly captured by two indexes compiled by Cornerstone Macro. One, using financial indicators such as the stock market and corporate bond yields, puts the probability the US is now in recession at 50%. The other, which adds in macroeconomic data such as loan delinquencies and inflation-adjusted income, puts the probability at just 28%.

Speaking Thursday in the second day of her semiannual testimony to Congress, Janet Yellen, US Federal Reserve chief, said conditions this year have surprised Fed officials with growing market expectations that the Fed may have to reverse its December 2015 interest rate hike.

We have been quite surprised by movements in oil prices. I think in part they reflect supply influences, but demand may also play a role. The strong dollar is partly something we anticipated, because the US economy has been performing more strongly and many foreign economies and we have divergences in the stance of monetary policy that influences capital flows in the dollar.

On Tuesday the Federal Reserve Bank of Atlanta published its GDPNow nowcasting model which forecasts real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 will be an annualised 2.5%.

Nevertheless, manufacturing is likely in recession because of the collapse in the oil price and besides struggling trade partners, falling stock prices through the year would dampen sentiment.

Falling tarde is hitting global shipping and Maersk, the Danish operator huge container ships , said this week that the the dip in global trade was worse than during the 2008 crisis. The Baltic Dry index is off 98% from the peak.

Negative rates

Last month the Bank of Japan joined the ECB and the central banks of Switzerland, Sweden and Denmark, in introducing negative rates, in effect charges, for holding banks' deposits at central banks, to spur lending in economies or keep the value of currencies lower than they would otherwise be.

Bloomberg reports that on Tuesday this week, economists at JP Morgan Chase, the US bank, suggested that Euro Area rates could drop to negative 4.5%. In the UK, rates could go to negative 2.5%. In the US, negative 1.3%.

they estimate if the ECB just focused on reserves equivalent to 2% of gross domestic product it could slice the rate it charges on bank deposits to minus 4.5%. That compares with minus 0.3% today and the minus 0.7% JPMorgan says it could reach by the middle of this year. The Bank of Japan’s lower bound on a similar basis may be minus 3.45%, while Sweden’s is likely minus 3.27%, the economists said. Should they also go negative, the Fed could cut to minus 1.3% and the Bank of England to minus 2.69% in JPMorgan’s view, reflecting how the ratio of reserves to assets is higher in their economies than elsewhere.

Nobody knows if negative rates actually work.

Kyodo News reports that Tokyo stocks tanked Friday, with the Nikkei index falling below the 15,000 line for the first time in 16 months, sold on the yen's steep rise and uncertainty about the global economic outlook. The 225-issue Nikkei Stock Average ended down 760.78 points, or 4.84%, from Wednesday at 14,952.61. Tokyo markets were closed Thursday for a national holiday. The broader Topix index of all First Section issues on the Tokyo Stock Exchange finished 68.68 points, or 5.43%, lower at 1,196.28.

Every industry category on the main section lost ground led by marine transport, financial and securities issues.

As in Europe, bank shares are falling because of bank profitability and survival fears.

For the week, the Nikkei dived 11.1%, the biggest weekly drop since October, 2008 and the Bank of Japan on Thursday saw the dollar fall as low as ￥110.98, its lowest level since October 2014.

The FT reports that with the currency now trading at ￥112.40 against the US dollar, the threat to Japanese stocks is perceived as especially high: market strategists at Daiwa Securities calculate that, at a rate of ￥110 per dollar, Japanese corporate profit growth slips close to zero. Most of the yen’s spike on Thursday — along with the rally that preceded it — appears to have been driven by speculative trading, said Shusuke Yamada, Japan FX strategist at Bank of America Merrill Lynch. But the rally may be close to exhaustion, he said.

Sweden’s Riksbank on Thursday cut its main overnight borrowing rate by 15 basis points to minus 0.5% and it warned that monetary policy could be made “even more expansionary if this is needed to safeguard the inflation target.”

Financial stocks are down by 19% in America. The declines have been even steeper elsewhere. Japanese banks’ shares have plunged by 36% since January 1st; Italian banks’ by 31% and Greek banks’ by a horrifying 60% (see chart). The fall in the overall European banking index of 24% has brought it close to the lows it plumbed in the summer of 2012, when the Euro Area seemed on the verge of disintegration until Mario Draghi, the president of the European Central Bank (ECB), promised to do “whatever it takes” to save it.

What would it take for Janet Yellen to reverse course on Federal Reserve rate rises? The FT's US managing editor Gillian Tett and senior investment commentator John Authers discuss the difficult balancing act for the central bank chair and the prospects for a change of tack in the face of market difficulties.